Good morning. My name is Shawn, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries Third Quarter 2016 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Chris O'Neal, Vice President of Strategy, Corporate Development and Investor Relations. Please go ahead, sir.

Thank you, Shawn. Good morning and welcome to EnPro Industries' quarterly earnings conference call. I'll remind you that our call is also being webcast at enproindustries.com, where you can find the slides that accompany the call. Steve Macadam, our President and CEO; and Milt Childress, our Senior Vice President and CFO; will begin their review of our third quarter performance and our outlook in a moment. Also joining us on the call today is Ken Walker, who is our Senior Vice President and COO. But before we begin our discussion, I will point out that you may hear statements during the course of this call that express a belief, expectation or intention, as well as those that are not historical fact. These statements are forward-looking and involve a number of risks and uncertainties that may cause actual events and results to differ materially from such forward-looking statements. These risks and uncertainties are referenced in the Safe Harbor statement included in our press release and are described in more detail along with other risks and uncertainties in our filings with the SEC, including the Form 10-K for the year ended December 31, 2015 and our Form 10-Q for the quarter ended March 31, 2016. We do not undertake to update any forward-looking statements made on this conference call to reflect any change in management's expectations or any change in assumptions or circumstances on which such statements are based. Our earnings release and conference call presentation materials contain additional disclosures regarding non-GAAP financial information, collective references to EnPro and our subsidiaries, the deconsolidation of Garlock Sealing Technologies or GST, and pro forma illustrative financial information presented as if GST were reconsolidated for financial reporting purposes. These disclosures are important to understanding comments we will make on today's call and we urge you…

Thanks, Chris and good morning, everyone. As an opening comment, I'd like to share that I'm pleased with our team's effort to deliver the best possible performance in market conditions that continue to be quite challenging. Our total pro forma segment profit for the quarter decreased by 2.5%, by 4.4% decline in pro forma sales. This resulted in a slight improvement in pro forma segment margin to 11.9% in the third quarter this year from 11.7% last year. The margin improvement was driven by a combination of our cost reduction efforts, significant restructuring and strong production efficiency improvements. This hard work is keeping our margins stable in an extremely difficult demand environment, and greatly improving our competitive position for the future. Total pro forma adjusted EBITDA decreased by 2.6% versus a year ago. Throughout the current industrial, we've taken a systematic and balanced approach to managing our performance. Over the past several years we've invested a lot of time, effort and capital in developing and improving foundational capabilities that we believe are critical to our long-term productivity, innovation, and growth. While the current market conditions require that we reduce cost and exit underperforming parts of the business. We implemented mitigating actions with a clear focus on the undermining our future success. These actions have significantly improved the profitability of our engineering products segment, and partially offset partly offset the negative effects of market headwinds on our overall results. Just as most of our industrial peers have announced in recent weeks, the markets conditions in the third quarter have continued to be weak. Nearly all of the markets that we serve have seen negative year-over-year trends and our sales have closely tracked that activity. Commodity prices in general remain depressed which is having a ripple effect through the oil and gas,…

Thank you, Steve. As discussed before the pro forma segment results that we’ll discuss are prepared as a TST, had been reconsolidated on the basis described in our earnings release. As a reminder, most of the difference between consolidated and pro forma segment information is in sealing products. With only small differences in engineered products and power systems, stemming from foreign operations of those segments included NGST formed subsidiaries. It is important to note that the pro forma results do not represent a projection of financials as of the future date of expected reconsolidation. Our pro forma third quarter sales of $331.1 million were down 4.4% from the same period 2015. Net of small CPI divestiture in Thailand, acquisitions contributed $4.1 million and foreign currency translations reduced sales by $1.7 million. Excluding the impact of these factors pro forma sales for these quarters were 5.2% lower compared to a year ago. The organic sales decline was driven primarily by continued weak demand that we are facing across many of our end markets. I will provide more color by market in a moment while reviewing quarterly results for each segment. Pro forma gross profit for the quarter of $116.2 million was 4.2% lower than in the third quarter of 2015 and pro forma gross profit margins were up 10 basis points year-over-year to 35.1% despite the lower sales. Total pro forma SG&A declined in the third quarter 2016 by $4.5 million to $82.3 million. As a percentage of pro forma sales, pro forma SG&A decreased in the third quarter to 24.9% from 25.1% in the third quarter of last year despite the year-over-year decline in sales. As Steve noted previously, excluding the restructuring cost, acquired SG&A cost associated with the rubber Fab acquisition and several unusual items in the quarter including…

Thanks Milt, will close to the discussion of current market conditions and our outlook for the remainder of the year, and then we'll take questions as we've described in the past, most of our businesses have relatively short order to shift the cycle which naturally limits our visibility of future demand with the exception of new engine production in power systems, typical order backlog ranks as well as 5-10 business days to a couple with 50% or more of our orders being fulfilled in a month or less, this characteristic coupled with the current have certainty of the global markets makes forecasting sales even more two quarters into future, as we've said we're experiencing weakness in heavy duty trucking or gas refining metals and mining industrial gas service in general industries, demand in automotive in aerospace is holding steady and semiconductor including one of our performing well, we have also built a robot backlog of nuclear orders, a portion of which is expected to ship in the fourth quarter. We expect pro forma sales to be flat to down a single low, single digit percentage on a currency neutral basis with growth attributable to the acquisitions completed, as early to that 2015 offset by general market related weeks, we indicated last quarter that we expected pro forma adjusted EBITDA to be flat to a low single digit percent decline compared to the 2015, excluding the costs associated with the AVL power train engineering offsets, and any changes related to ETF that are largely a function of foreign currency rates. We still believe we will be in that range but more likely towards the lower end both pro forma sales and pro forma adjusted and pro forma adjusted EBITDA assume constant currency from the end of the third quarter through the end of the year. I want to emphasize market development performance because our results either positively or negatively relative to this guidance. And now I’ll open the line for your questions.

[Operator Instructions] And your first question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is now open.

Good morning. So I just wanted to a little bit more to do it because of the three businesses written Sealion [ph] it looks like core growth - growth was negative 20. If I look at the right for the ST. business but maybe just work through maybe how technics did, how stem code did, and how…

Jeff as Steve and I discussed it was pretty challenging from a market condition standpoint in the segment. The same factors we discussed for the earlier in the year for the first two quarters of the year and continued the third quarter. With that ceiling and this is above the consolidated and deconsolidated part Garlock. I think the we saw some notice of deterioration that we saw in the Q3 expected, it wasn't unexpected it was the effects of a slowdown on the shipping side things which affected STEMCO in a fairly significant way on the quarter-over-quarter basis. We were down year-over-year on the top line in the segment. It was most noticeable that STEMCO is the largest decline, and take Maddox had a mid-single digit decline year-over-year on a normalized basis and Garlock was in that same category or same neighborhood if you take out the impact of the Rubber Fab acquisition. And given the markets that your question about GST, I don't have the specific numbers for GST in front of me. We could pull it out but given the fact that we have much more exposure to metals and mining refinery some of the challenge markets. We did experience a more significant decline year-over-year in GST than we did in the consolidated part of Garlock. Our pipeline business remained which is a consolidated positive on year-over-year as was the case in the second quarter. Does that answer your question, Jeff?

Steve, you mentioned having a little bit better visibility; can you just talk about how you're thinking about that trajectory into 4Q and into 2017? I'll then get back in queue, thanks.

Well, I think - I think we're better stay on the current pace in Q4 that we've been on. I mean we're that we're scheduled to ship a bunch Engines starting next year for ETF, we'll get a couple out in Q4, but that percent complete basis anyway, so I think if you look at our aftermarket projection relative to Q3 will be - will be a little bit lighter than that and anything course we ship from any work we do on ETF whether it ships or not [indiscernible].

Jeff you may remember we had a really strong fourth quarter from an aftermarket parts standpoint last year in 2015, and the and we don't we don't see that pattern happening this year. So we're expecting power systems to be down on your basis we can head to the next quarter.

Your next question comes from the line of Ian Zaffino with Oppenheimer. Your line is now open.

Hi. Great. Thanks, guys for taking the call. Question would be on the acquisition side or on the acquisition front. What are you seeing as far as the pipeline right now and just given all the weakness, are you seeing any potential targets that are in a weakened position where you might be able to take advantage of that or are they also kind of holding out maybe for some type of cyclical recovery Thanks.

Yes. We're seeing a fair amount of activity but, it's mostly from companies that have been healthy and that are operating quite well. We're being very selective because prices of those businesses that are performing well remain elevated, but we do have a backlog that we'll continue to work through it. We have not seen a pickup in I would say distressed assets. I think most companies that have had healthy balance sheets are choosing to wait until some recovery before making a decision of coming to market. I know in the only gas industry we've seen some of that, but given where our focus has been sealing products with Technetics Group, with aerospace, with industrial gas turbine businesses, semiconductor and the hygienic space in Garlock where we've had a great deal of focus. We're not seeing distressed assets coming to the market right now.

And that has been our focus, Ian. I just want to add to that. We're not looking at this point to dabble down in oil and gas, metals and mining and so forth. We're trying to pick off companies that strengthen our position in some markets where we'd have a little bit better long-term outlook price, like Milt said like aerospace and even in trucking where we have seen some weakness, but our focus as you know is very much on the aftermarket and even though we've seen some sequential weakness in the aftermarket, it's not that falling off the cliff by any stretch. New truck new trailer builds are down quite a bit while still at decent levels at least on the trailer relative to history. So we still believe that we have a very strong position through STEMCO in the trucking aftermarket, so that might be a place - we're not looking any assets now that we think are distressed. The best where we believe we can still get a reasonable valuation but we're looking in food and pharma, in semiconductor and others that have a little bit better long term prospects and not focusing on some of the deep traditional parts of the Garlock and Technetics. That's our strategic direction. That's premeditate, in other words, that's what we're thriving because we're not just about to doing acquisition for acquisition's sake, we're trying to do it to strengthen the company for the future in terms of our portfolio, of lives we serve.

All right, thank you very much. That's really helpful answer. Thanks for the color.

Yes.

[Operator Instructions] And your next question comes from Joe Mondillo with Sidoti & Company. Your line is now open.

Hi, guys, good morning.

Hi, Joe.

I have a few questions on power systems. First off, looking at the fourth quarter, the revenue - I know you addressed aftermarket parts not being as strong and I imagine that margin is going to be lower - easily lower year-over-year - but the revenue on the fourth quarter of 2015 was pretty inflated. Are you expecting that to be a very tough comp on the revenue side of things? And then on the last call I believe you said the back half of the year of this year, margin was going to be similar to the first half of this year. So if that's still sort of the case, that would put fourth quarter margins at maybe potentially single digit area. So I'm just wondering your thoughts on that.

Yeah you got it right, Joe. The system in what we've talked about previously on a year-over-year basis in power systems we expect sales to be down in the fourth quarter and we also expect operating income in margins given the outlook for the aftermarket parts of the business to be down. We could be single digit. It all depends. We don't know completely what will come in on aftermarkets. We have a pretty good read on what's going to happen on the new engine shipments side and the percentage of completion revenues, but from an aftermarket standpoint there are still some uncertainty there.

Okay.

But clearly, it's going to be lower than it was in the fourth quarter of last year.

Okay and then sort of on the revenue side comparing it to - you've been trending around a little over $50 million the last three quarters on the revenue side of things. The last two years you've seen a big pop in revenue in the fourth quarter. Are we still anticipating sort of a sequential pop and maybe just not as strong as a year ago or could it be sort of similar to what you've seen in the first three quarters of this year?

Yes, I think it's going to be more comparable to what we saw in the third quarter. I don't anticipate given the pressures we're seeing in the market that it's going to be up. I think we talked about this, I know we did earlier in the year, or maybe after the first quarter that we anticipated certain amount of revenue at zero margin that would affect the top line in power systems this year that we had a contract. It's an old contract that we expected to complete and it's our last significant program on a completed contract basis with revenues of roughly $10 million that has been deferred into 2017. So, that will obviously affect the top line. It won't have any impact on the bottom line since it was at zero margin.

All right, great. And then looking at 2017, a few things. The OPC contract that you just announced. I'm wondering if you could help us sort of understand maybe the magnitude of benefits that that program is going to benefit you on an annual basis in terms of revenue and is this going to be similar-type margin that you received in terms of the overall segment margins? Any help there would be great.

Well, as I mentioned in my remarks, Joe, the first ship is not scheduled to being served until 2021. So, we don't anticipate a lot next year because it will [indiscernible] some of the long lead time procurement items on a percent-completion basis. We wouldn't really build a whole lot in for next year, at least in terms of what we know now down the road. Obviously it's two good-sized engines per ship and it will crank up in earnest in '18 and '19 and it will be at I would say normal new engine margins that we see as you know is that there's a heavy mix effect in Fairbanks based on aftermarket parts and service relative to new engines. That's why it's always difficult and while it's fairly easy to look forward for a new engines, it's actually not easy to look forward in the aftermarket because we get stuff rights, we get emergency orders that we have to get out and those typically carry the better margin and we can't see those coming in many cases. These are these are predominantly for engines that are fully in service. Right? And a lot of it requires fabrication. That's why we have a little bit of trouble pinning exactly what the aftermarket looks like and the size of many of these aftermarket orders - even relative to the size of sales of Fairbanks in any given quarter can move it quite a bit. If the team is able to get out literally in the last couple of weeks of the quarter, is able to get out a lot of aftermarket orders that we haven't anticipated, it will make a big difference. We had that benefit last year fourth quarter and we set a record in Q2 this year of aftermarket part sales. Both the year-over-year and the sequential comps are tough on Fairbanks Morse. I think if you look at kind of our level on the aftermarket side in Q3, that's probably a better guess that we're going to do in Q4. That's how we think about it, anyway.

Okay. And then a couple of other questions actually. In terms of 2017 outlook, I know you have the EDF contract and I think that's going to weigh on your margins just given how that sort of program has sort of worked out.

Unless currency moves in in our favor. That's the other thing that can happen. If for whatever reason the euro strengthened substantially relative to the dollar back towards where we were when we cut the deal, it would jump into positive territory because as you know we have to account for this, that the bookings we're taking now assume the currency stays the same through the end of the entire program - not just for this quarter, but the end of the entire program.

Right. Actually that's a good point. Thanks. Just say for hypothetical, if currency stays flat from here, upside...

Then it's a lot of zero margin revenue.

Right. And then you have this $10 million deferred. We're probably looking at down margin, maybe potentially near single digits next year temporarily and then maybe 2018 looks a lot better. Is that a good way of looking at the segments in 2017?

On the margin front, I think that's accurate. We should have a pretty darn good sales year next year for Fairbanks and I would actually anticipate the gross margin dollars. The other stuff that we're working on obviously carry - the engines that got deferred in the next year are done. They're just waiting to shift, so they're not going to drive any cost. The activity that's going on in the shop other than the EDF obviously still carries a margin. So it's going higher revenue that comes with no margin.

You're correct, that's going to drive margins because there will be a significant amount of revenue associated with the contract that is deferred to next year, the $10 million that we referenced earlier plus EDF.

Okay, great.

But unless currency changes, the combination of those two will have a significant impact on margins next year.

Great. Okay. Exactly what I was looking for. And then lastly, could you update us on the OP 2.0, where we are in that exactly in terms of sales and where we are in terms of innovation and everything regarding that?

Yes. Well, it's very exciting to me. It's probably still a little too far out to get too excited, but we are entering the final test phase between now and the end of the year, the final - what I call R&D test phase of the OP 2 - and by the end of the year we will have or very early next year we will have established all of the operating design parameters that we were looking to figure out. Again, the performance of the engine has been very, very good. It's been frankly at least meeting, if not exceeding our expectations in terms of the technical performance of the engines. So we're quite excited about it and then beginning next year we will begin building essentially the first engine that we want to get into service. It will still be a 'developmental engine' because we will need a launch partner that is prepared to put it in the field and run it. We have a few customers that are interested in being our launch partner and we're still working with them. But we won't be in a position to actually probably sell. We're hoping that late in '17 when we have an engine that has been in the field for a while, is really performing, we can actually point to it and show the actual results of when we'll start to be able to hopefully to books and sales and then based on that we'll keep you informed. We're pretty pleased with where we are in the program.

Okay, great. Thanks a lot. Appreciate it. I'll hop back in queue.

Yes.

I want to add one comment to Jeff's question earlier about sealing because I think we probably ought to give you a little color on heavy duty trucking and what we're seeing there. There's no surprise that on both the OE side; trailers and tractors, that we've seen decline this year. So the impact that we saw in Q3 was partly related to that, it's in the part of our business that has more exposure to OE which is more on the brake product's side, than it is our wheel and ceiling products. So we saw some effect there, we also though had a reduction in the top line in STEMCO as a result of some planned exits that we decided when we were talking earlier associated with the Air Springs business where we made some decisions to redirect our volume to the aftermarket from the OE business and so there is a - that creates a kind of a loss that was planned, that didn't really affect our profitability as much as it did the top line. And then finally, we've had some supply chain disruptions that are leading to a temporary loss of sales that we'll catch up on later in the year. So just a little bit more color on STEMCO, the business, the team is still performing quite well.

At this time there are no further questions. Pardon me, we do have a question from the line of Joe Mondillo of Sidoti & Company. Your line is now open.

I just had a couple of follow-ups if you don't mind. First off all, in terms of the engineered products segment, if you were to take out sort of excluding - sort of the planned site exits on a revenue basis what kind of revenue year-over-year decline would that be?

Yes, it's a really tough call Joe because when we - lot of insights - we're actually were in Western Canada; and then two phenomenon happened. One is, we sold under our agreement rather than shutting down, we actually sold one of the larger of those sites to - essentially the management team up there and entered into a parched contract to continue selling CPI parts through them. And the second is, we did keep some sites opened in Western Canada, the ones that were profitable because we were able to shift some of the product - some of the customer volume that we were - that we had in the sites, we only shifted to the sites that we kept open. So we haven't been kind of quoting anything because quite frankly, it's just very, very hard for us to determine how much of that business we actually retained versus not. Certainly we did move some volume by sites that were exited but we didn't lose - if you follow, we didn't lose 100% of the volume from a 100% of the sites that we exited. So if you're asking about the general market - we feel in CPI, I certainly think that Q3 was about on-par - if you've kind of think about seasonally with where we were in Q2 and this year was definitely weaker than last year in terms of just market demand. But the good news is - in some geographies we saw some weakness, Milt mentioned in Europe in this quarter. But it feels to me like things have stabilized and we have a decent backlog at some of our sites. So I think we're - I think we've got the worst of it behind us and the question then just becomes, what's the refining then in petrochemical and gas pass volume going forward. I know that's a qualitative answer to your question and you probably wanted some numbers but we really just can't -

No, that actually gives enough color that I can sort of understand what you're sort of talking about. I appreciate that. It sounds like things are stabilizing. In terms of GGB, its - if I read - I think in the release and in your commentary, it sounds like that business has been sort of stable as well. So overall, the engineered product segment - can we call that somewhat stabilizing at this point in the near-term at least?

Yes. I mean from a top line it's been fairly stable. We're down a little bit in Q3 because it continued weakness year-over-year but we're performing much better at a much higher level. I think you picked up on the comments that we've made and just by looking at the segment margins. So there is significant improvement in our performance. But it's not coming as a result of volume, we're still feeling challenged from a volume side. In GGB as well as CPI as Steve covered.

And then last, actually - in terms of the restructuring, the $20 million; how much of the benefit have did you really see in the third quarter and I imagine most of the rest of the benefit incrementally will be in - I guess the fourth quarter and the first quarter considering that it will be done by year end but I guess you'll see a little bit of incremental on the first quarter?

Let me, and Milt can add to this Joe. As we said in the last call, most of the actions that we implemented were actually very, very late in Q2. So we went into Q3 with a very high percentage of the actions done and then obviously we had the European fall-through and so forth. So I think we got pretty - I think we're pretty darn close to the full run rate that's already reflected in Q3 numbers.

Joe, we've provided a little bit of additional information in our prepared remarks around pro forma SG&A and while not all of the restructuring shows up in SG&A, it's enough that information gives you some flavor sequentially. For reduction in costs compared to the second quarter. And you can see by that that we've - it just backs up what Steve has just said that we're really getting that run rate pretty much shown up fully in the third quarter.

Okay. And then just lastly in terms of regarding GST, while the year-over-year comparisons have been really tough and I mentioned that end-markets are still a little uncertain, the absolute number - the absolute value of your revenue over the last three quarters have been fairly, where usually it tends to peak in the second quarter; and it's down in the third quarter. And then also same type trend with the margins, they've been fairly stable this year. So just wondering if that's any indication that maybe things are stabilizing at GST?

We don't feel like things are getting worse and as I mentioned earlier - but we continue to have these challenged markets with metals and mining and refining and petrochemical. We don't feel - like it's getting worse - I think your observation backs up the data that you're looking at, it backs up what we're seeing.

Okay. All right, thanks a lot. I appreciate it.

And there are no further questions. I turn the conference back to Mr. O'Neal for closing remarks.

Thank you, Shawn and thank you all for joining us this morning. If you had any additional questions please give me a call at 704-731-1527. Have a good day.

This concludes today's conference. You may now disconnect.